Are you paying too much in interest? Or want to create a storage of cash savings to draw upon when required? You might want to consider a home loan with an offset account.
Here are five reasons why a home loan offset account might be beneficial to you.
An offset account is a feature attached to a home loan that offsets the balance in the account against the overall balance of your home loan. They can be either partial, say a 50% offset account, or a 100% offset account.
On a 100% offset account, if you had a loan balance of $300,000 and $30,000 in an offset account, then you’d only actually pay interest on $270,000 ($300,000 - $30,000). On a 50% offset account, you’d pay interest on $285,000. This means they basically operate like a savings or transaction account specifically for your home loan.
Generally speaking, offset accounts are only available on variable rate home loans, although select loans might offer them on fixed products. Loans with offset accounts also tend to charge slightly higher interest compared to ‘basic’ home loans, but this isn’t always the case.
One of the main benefits of an offset account, as mentioned earlier, is that you reduce both the length and amount owing on your home loan by saving money directly into your offset account (i.e depositing your salary in there). The more you have in an offset account, the less interest you have to pay on your mortgage.
Let’s say you have $400,000 owing on a 2.50% p.a. mortgage for 25 years, and after 5 years you put $40,000 in your offset account. By reducing the principal by $40,000, you could save approximately $23,500 in interest and roughly two year in time.
Offset accounts can be a much more beneficial place to store your savings than a standard savings account. Offset accounts don’t technically have an interest rate that earns interest. Instead, your offset account offsets your home balance using your home’s existing interest rate, which is usually much higher than the average savings account.
While you might only earn a marginal amount of interest in a savings account, that money tends to work much harder in an offset account.
Another benefit to an offset account is that you can also access that money when needed, such as for major renovations, paying off crucial debts, big life events like weddings, and so on. This means you’ll no longer be offsetting your mortgage by as much, as any money you take out of there will be re-added to your loan principal, and some lenders may charge a fee for withdrawals.
But a good offset home loan will give you unrestricted access to that money. You just need to consider if accessing it is the best thing for you to do, as it can be more beneficial long-term to leave it in there.
A good offset account can make your home loan a much more flexible product: You can deposit your salary straight in there instead of a regular bank account, you can withdraw the payments as required, and allow you to pay your bills from it.
Although having an offset account isn’t essential to having a good home loan it can certainly help, and can help you combine your mortgage with your everyday banking.
Interest earned, such as interest in a savings account, is usually taxed at your marginal tax rate as it is considered income. Offset accounts on the other hand don’t technically earn interest, and as such aren’t taxed as taxable income.
So in addition to not paying tax on the amount in the account, you can also save thousands of dollars off your loan.
loans.com.au offers a 100% redraw offset facility that you can add to your home loan to help you pay off your loan faster and with less interest. This loan includes unlimited, fee-free redraws, no monthly or ongoing fees, full access to your money in the redraw offset facility via a free VISA debit card and more.
If you’re looking for a loan with a redraw-offset account to help you save time and money on your home loan, then book an appointment with one of our friendly lending specialists now to learn more about your options.